Globally Imbalancedhttps://globallyimbalanced.wordpress.com
Just another WordPress.com weblogThu, 22 Feb 2018 06:33:12 +0000enhourly1http://wordpress.com/https://s2.wp.com/i/buttonw-com.pngGlobally Imbalancedhttps://globallyimbalanced.wordpress.com
Project 70https://globallyimbalanced.wordpress.com/2010/10/27/project-70/
https://globallyimbalanced.wordpress.com/2010/10/27/project-70/#respondWed, 27 Oct 2010 01:36:35 +0000http://globallyimbalanced.wordpress.com/?p=73It’s sounds like its out of a classic war movie, but it’s another battle on the front lines of the currency war. A strengthening JPY has been the bane of Japanese exporters for years and as the pair hit a 15 year low nearing the dreaded 80 mark, exporters have every reason to be nervous.

But one company is fighting back. Toshiba apparently began preparing last year for the extreme case that the USDJPY would hit 70.00, instituting an analysis of their business processes called “Project 70”. Rather than just sitting back and watching their profit margins eroded by factors completely out of their control, they took action and ended up with billions of Yen in profit thanks to the foresight:

Toshiba made 48 per cent of its products in Japan in the period from April to September 2009 and bought 45 per cent of its components from Japan-based suppliers. By the same period this year, the ratios were down to 44 per cent and 42 per cent respectively.

The change added Y4.2bn to Toshiba’s operating profit in the half to September, or Y700m for each one-yen increase in the Japanese currency’s value against the dollar. That compared with an Y800m loss on each increase last year.

Having spent my past life working with corporate treasuries in managing their FX risk, it was amazing to see how this risk was always treated as something peripheral. You have companies like Nintendo having all their successes in the product realm being wiped out by lack of planning in the currency realm. FX hedging decisions were often just handed off to junior people.

People want to ignore currency risk because it’s not part of the core business, yet in the coming years, as competitive devaluations and inflating our way out of the deep, dark hole of the financial crisis take hold, it’ll be more important than ever for companies to proactively plan their production strategies around currency risk (yes, I know I’m talking my book here as a former currency market maker).

Every multinational company needs their own Project 70.

]]>https://globallyimbalanced.wordpress.com/2010/10/27/project-70/feed/0ranjanxroySingapore Gets Serioushttps://globallyimbalanced.wordpress.com/2010/04/15/singapore-gets-serious/
https://globallyimbalanced.wordpress.com/2010/04/15/singapore-gets-serious/#respondThu, 15 Apr 2010 11:09:16 +0000http://globallyimbalanced.wordpress.com/?p=64China may be dominating the headlines, but my current nation of residence, Singapore, made some news of their own last night. After an off-the-charts 32.1% Q1 GDP number, the Monetary Authority of Singapore (MAS) came out swinging against inflation by announcing a one-off revaluation of the Sing Dollar (SGD), along with a move to an appreciation bias against the basket. Nizam Idris, a strategist at UBS, noted:

“The double-barrel monetary tightening was an uber- aggressive move. It tells me that the economy is expected to do very well and there are concerns about long-term inflation and asset- price inflation, which argues for a much stronger currency.”

Now you may be asking yourself what these actions actually mean, and for that matter, who the MAS even is. The MAS is the effective central bank of Singapore and they control monetary policy a little differently than we’re used to in the U.S.

The Singapore Dollar (SGD) is allowed to trade in a band against a ‘basket of currencies’ whose composition is undisclosed. It’s different from a currency that’s just pegged (like the CNY) as the MAS also lets the SGD float around the targeted midpoint in a band of a few percent. Most banks create some model based on size of trading partners to try to replicate the MAS basket to forecast moves in the SGD.

Let’s say on a particular day the USD and JPY are both appreciating against most other currencies, based on their weight in the basket, the MAS will let the SGD appreciate a certain amount as well. It’s when the currency starts being pressed against the outer reaches of the ‘band’ that the MAS will make its presence known. It was always fascinating when all the major ccy’s were volatile and the SGD was following suit, and suddenly the MAS would absolutely shut down currency movement with massive orders. They do this 24 hours a day to maintain the integrity of the currency band, and as a trader, you knew when it was time to step back.

Now that is how they monitor the band on a daily basis, but what did their policy actions yesterday actually do? As mentioned above, there is an effective midpoint of the band around which they allow fluctuation. Their action of a “one-off revaluation” was significant because they moved that midpoint or central target, making the SGD effectively stronger against the basket. It would be the same as if China revalued the Yuan from the current 6.83 to 6.53 in one shot, but with the SGD it’s against a basket as opposed to just the USD.

The second, and slightly more complicated aspect, was the move to an “appreciation bias”. Based on inflation expectations, for each policy meeting, the MAS will decree either a “bias” that will slowly let the midpoint either strengthen, weaken, or remain stable against the basket. The MAS announced a switch from the neutral bias, to the new “appreciation bias”. The midpoint around which they let the currency fluctuate will now slowly be allowed to appreciate against the basket over time. This allows for a very gradual intrinsic appreciation of the currency to help fight inflation.

Whether or not my mechanical explanation above makes any sense, what is important is that this is the first time in 39 years that the MAS took the “double-barreled” action of a one-off reval plus a change in the bias. This should be significant for Southeast Asian growth expectations along with regional currency views. Whether this is a prelude to a China move remains to be seen, but what can’t be denied is, with an absurd 32.1% GDP growth number in Q1, Singapore is getting serious about fighting inflation.

That’s right. China actually posted a trade deficit this March, the first monthly deficit since April 2004. They reported a deficit of $7.24bn for March, down from a surplus of $7.61bn in February. Alert the media! Does this mean I have to change the name of my blog and that issues surrounding global imbalances have been resolved ?

As always, there’s the good news and the bad news. Let’s start with the bad news. China still has a massive trade surplus with the US. The main deficit in this month’s numbers came from China’s trade with Taiwan, South Korea, and Japan. The issue of structural imbalances allowing Chinese exporters to subsidize US consumption has not been remotely addressed by these figures. Of course, we’re already hearing from our friends at the China Ministry of Commerce, who are exclaiming that:

“The continued improvement in our country’s balance of trade has created the conditions for the renminbi’s exchange rate to remain basically stable,” spokesman Yao Jian said in a statement, using the currency’s official name. He said the fact that China ran a deficit in March, without any move in its currency, shows that “the deciding factor for the balance of trade is not the exchange rate, but market supply and demand, and other factors.”

This number is additionally biased as many Chinese exporters were closed for the Lunar New Year holiday. The export lobby is naturally going to jump all over this number, but I’m hoping the economists and government officials in charge are still properly monitoring the longer-term trend.

Now for the good news. It should be noted that the deficit was not due to declining exports, but rather a 66% surge in imports. Exports were still up 23.4%, down from 31.4% growth in January and February. The most important thing to realize about this jump in imports is that:

Import prices rose 17 percent in March from a year earlier as raw-material costs climbed, Huang Guohua, a customs bureau official, said at a briefing in Beijing before the data were released. Net imports of crude oil were the second-highest on record, the bureau said.

Remember this moment…import prices are rising in China. An artificially weak Yuan is great for exporters but the tradeoff is that domestic consumption is hurt with a higher price for imports. Even more important to keep in mind is commodity imports. China’s demand for commodities will continue to grow, and most commodities are priced in USD. Keeping the CNY weak against the USD means that while China’s own businesses import oil and metals to function, it will get more and more expensive for them. This is one of the more pressing examples of the internal political divide that exists between the exporters who want to maintain this unsustainable currency arrangement, and the rest of the country that for the longer-term would benefit from a stronger CNY.

Unless China thinks we’re heading back to $30 oil, or that their appetite for commodities will decrease over time, this month’s trade deficit should not be taken as a sign that all is well with the Yuan. In fact, it’s a reminder of the unsustainable situation that their own development requires they address. It’s just another piece of the overall puzzle indicating that measured action to strengthen the Yuan should be taken in the coming months.

]]>https://globallyimbalanced.wordpress.com/2010/04/12/did-you-say-trade-deficit/feed/0ranjanxroySlowly but surely….https://globallyimbalanced.wordpress.com/2010/04/09/slowly-but-surely/
https://globallyimbalanced.wordpress.com/2010/04/09/slowly-but-surely/#respondFri, 09 Apr 2010 14:05:05 +0000http://globallyimbalanced.wordpress.com/?p=53Eleven days ago I mentioned the number of increasing signs that a Yuan revaluation was imminent, along with the similarities to the buildup to the initial 2005 reval. The past few days have only stepped up this feeling of inevitability as Tim Geithner following the tactful decision to delay the currency manipulator report with a surprise visit to Beijing.

Accompanied by his trusty sidekick, the aptly named David Dollar, Geithner met with State Council members Wang Qishan and Dai Bingguo at the VIP terminal of the Beijing airport. Both of the Chinese officials are from the State Council and will be leading the upcoming Strategic & Economic Dialogue. It’s important to note that the US officials were given access to State Council members, who are generally above the politics of the PBoC and Commerce Ministry. The PBoC (People’s Bank of China) have appeared much more understanding of the need to revalue, while the Commerce Ministry, under the influence of the domestic export lobby, has been the most vocally resistant. Wang Qishan is one of the four highest ranking assistants to Hu Jintao, indicating that cooperation is coming from the very top on the Yuan issue.

Wang Qishan (center) talking hoops with Obama

I imagine we’ll continue to see this internal Chinese battle play out over the coming days or weeks before any concrete action is taken. Just hours after the meeting with the US Treasury, Yi Xiaozhun, a vice-minister in the Commerce Ministry, claimed, “the crisis is not yet over, and so an increase in the value of the yuan now would hurt China’s economy.”

Again, we’re seeing shades of 2005. There were constant mixed messages coming out of Beijing which led to very volatile USD/CNY trading (and consequently large fluctuation in all Asian currencies). There were ridiculous moments like when a State-run newspaper’s English version reported that a reval was imminent and there would be a 3% band, and then hours later a government statement was issued that the English story was in fact a mistranslation.

If you’re at all involved in these markets, it’s definitely time to get ready for some excitement. While the long term might be an inevitability, the coming months should be anything but calm.

]]>https://globallyimbalanced.wordpress.com/2010/04/09/slowly-but-surely/feed/0ranjanxroyWang Qishan (center)Good move, Geithnerhttps://globallyimbalanced.wordpress.com/2010/04/05/good-move-geithner/
https://globallyimbalanced.wordpress.com/2010/04/05/good-move-geithner/#commentsMon, 05 Apr 2010 13:56:10 +0000http://globallyimbalanced.wordpress.com/?p=43After seeing domestic Chinese leaders voice their acceptance of a stronger Yuan last week, I’m becoming convinced that Yuan appreciation is on the horizon. The next few months are so crucial that I got a bit nervous that Obama and Co. might miss a potentially great opportunity to work with the Chinese and get too aggressive in the April 15th “Semiannual Report on International Economics and Exchange Rate Policies”. They’ve seemed to take a general “long-view” approach on most of their agenda, but this probably is the issue where they can score the easiest domestic political points.

I was still fairly surprised by the Administration’s move this week. The Administration didn’t take the aggressive action of labeling China the first currency manipulator since 1994, nor did they ignore this issue that does need to be addressed in some manner. Instead, Geithner made a statement that they’ll delay the April 15th report to instead work to resolve the issue via three critical diplomatic forums over the next few months:

There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy. Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time.

Surplus economies with inflexible exchange rates should contribute to high and sustained global growth and rebalancing by combining policy efforts to strengthen domestic demand with greater exchange rate flexibility.

China knows that in the long run they need to shift to domestic-demand driven growth, and artificial CNY strength against the USD is only delaying this transition. This current system of Chinese exporters being subsidized by Chinese households/consumers, and US households being subsidized by a weaker US export/production sector cannot continue forever. Their leaders are speaking about the need for this major economic transition, and policy like their stimulus show concrete actions are being taken. It’s going to slowly happen, the question is just, how smooth will it go?

The good scenario: The weak CNY is effectively a trade subsidy for Chinese exporters who have been able to become kings of cost-competitive, low-margin, manufacturing export businesses. In a perfect world, the CNY would gradually strengthen until it could even be free-floating, while Chinese domestic demand would concurrently increase. The former export business leaders adapt to meet this rising demand by creating innovative, world-class businesses. End result: everyone is happy as the US regains some strength in their manufacturing and export businesses and the Chinese consumer fuels a new channel of long-term, stable, Silicon Valley-style Chinese growth. Wonderful!

The bad scenario: Chinese exporters rapidly lose their implicit subsidy through either a significant CNY revaluation or a trade war. These businesses have become somewhat dependent on this cost advantage and could shut down because they can’t compete any longer. Chinese unemployment rises as jobs leave the country, and any shot of having the future strong Chinese consumer that’s supposed to rebalance the global economy vanishes. Not Wonderful.

The scenarios outlined are definitely as oversimplified as the rhetoric that generally comes out of D.C., but the logic is simple. Both China and the U.S. know that we need to move away from the current system of Chinese manufacturers and exporters subsidizing US consumers. The issue is how we make this move and the stakes are what type of growth we will see in both hemispheres in the coming decades. It was a relief to see that Geithner and Gang are willing to take an extra few months to address this issue that has been brewing for years and directly engage Chinese officials. Chinese officials and leaders appear ready to resume the slow transition to a stronger CNY that began in 2005. Lindsey and Chuck, it’s going to happen so no need to get so worked up. Instead of lighting a fuse through some arcane report that the average American has never even heard of, I’m glad to see that these complex and crucial economic issues will be addressed at forums like the “Strategic & Economic Dialogue with China”.

I started up this blog this week as I felt the coming months will be critical in US-China relations, especially related to currency. Yesterday’s example of leading Chinese businessmen coming out in favor of a stronger Yuan definitely struck me as an indication that the government is slowly considering allowing some CNY strength.

Well, today, add another two voices. First, came Cheng Siwei, a former Chinese lawmaker who is advocating a 6% band (3% above or below a midpoint). He commented, “I read a report saying that a 2 percent appreciation in the yuan might kill China’s textile industry. That is certainly an exaggeration.”

Mr. Cheng appears to be a longtime Party member, reaching the ranks of Vice Chairman of the 9th Standing NPC Committee in 1998-2003. These voices, grounded in public service, are exactly the type of voices to be listening for in the crucial month ahead.

Even more in line with the “random, seemingly trivial” leaks I mentioned that led up to the 2005 reval was a report in Caijing Magazine. An anonymous government source was reported saying, “If the central bank does not want to see a quick rate hike, a better way to fight inflation would be to expand the daily yuan trading band to allow the yuan to appreciate properly.”

I cannot stress the importance of these leaks and officials voicing their concerns. The tight control of the Chinese media is still firmly in place and it cannot be simple mistake and coincidence as these statements are released. My concern is that overly aggressive moves by the US government (i.e. an April 15th citation as a ‘currency manipulator’) will move this from a logical, economic debate to a nationalistic debate catalyzed by pride.

*Also of note: Caijing Magazine was a longtime, contrarian voice in the Chinese financial press, run by Hu Shuli. Hu’s departure in November 2009 was decried by many as a government takeover of a formerly independent voice. This actually makes the idea of Caijing printing the above statement without some implicit government permission even more implausible.

]]>https://globallyimbalanced.wordpress.com/2010/03/31/add-another-one/feed/2ranjanxroyVoices From Withinhttps://globallyimbalanced.wordpress.com/2010/03/30/voices-from-within/
https://globallyimbalanced.wordpress.com/2010/03/30/voices-from-within/#commentsTue, 30 Mar 2010 14:36:23 +0000http://globallyimbalanced.wordpress.com/?p=33One of the odder aspects of the US -China currency revaluation debate is trying to keep track of which groups in which country support what. A stronger Yuan would hit Chinese exporters hard, as the stronger currency would make their products more expensive for US customers who transact in dollars. The flipside is the Chinese households that would increase their purchasing power of foreign products, buying cheaper goods with their newly strengthened currency. As Michael Pettis noted,

There is a significant transfer within China of wealth, which will create clear winners and losers. Basically any economic entity that is explicitly or implicitly long dollars (by which I mean any foreign currency not pegged to the RMB) and short RMB, will lose in a revaluation. Conversely, any entity that is explicitly or implicitly long RMB, and short dollars, will win.

The Chinese export industry is the obvious loser and currently has the ear of the Commerce Ministry, trying to prevent any CNY revaluation. The PBoC itself would take a significant hit as they have significant USD holdings. Companies holding stockpiles of commodities would lose, and basically any Chinese person with a large USD savings account somewhere would take a hit. On the other hand, every Chinese household with a CNY savings account would come out a winner as they could then buy foreign goods cheaper. This could contribute significantly towards the continued rise of the middle class and equitable growth across China.

The last month has seen aggressive posturing from both sides. However, there was a significant breakthrough this week as some of China’s leading businessmen actually supported the idea of a stronger Yuan.

Lenovo CEO Yang Yuanqing recognized the increased purchasing power effect mentioned above, telling reporters that, “We may not worry too much about exporters if we can conduct more yuan-denominated trade.” Lenovo is the ideal example of where China could be heading. A stronger Yuan would hurt lower margin textile and manufacturing Chinese companies, but a company like Lenovo would benefit tremendously from a new class of empowered Chinese consumers. Furthermore, it symbolizes the high-tech, higher-margin manufacturing businesses that China has the potential to create.

Chen Daifu, the Chairman of Hunan Lengshuijiang Iron & Steel Group told Bloomberg News, ” “Yuan appreciation will bring us benefits because we import several billion yuan worth of ore every year from abroad.” Iron price hikes in the past year hit Mr. Chen’s company hard and they are realizing that the value of exporting cheaper steel may soon be outweighed by more expensive import requirements. As companies begin to weigh short-term export related benefits against longer-term domestic growth stories, hopefully there will be increased pressure to build domestic consumption by every means possible.

These statements should not be taken lightly as they appeared to be directly in conflict with most recent comments out of the Chinese government. Belinda Cao and Judy Chen over at Businessweek astutely noted that, “As Chinese business leaders speak out, it becomes possible for Beijing to act without being seen as bending to U.S. pressure.”

This is a critical observation as it reminds me of the buildup to the initial July 21, 2005 revaluation. It was random, seemingly trivial events like this that in retrospect were the crucial signals of impending action. Up until the very day of revaluation, nearly every government statement was still against a reval and anti-US pressure. Occasionally you would get a rogue Central Bank official or leading Chinese scholar saying something about needing to reval, who would then magically retract his statement. Looking back, these “rogue” statements and leaks became more and more frequent up until the day of the reval. There were theories among the traders that info was being leaked so the PBoC could monitor price movements as they worked to determine a proper reval amount and strategy. I’ll never know if this was true, but I believe having major figures come out in this public of a manner indicates that all options are being seriously considered.

A long-term rebalancing of both economies involved is inevitable in some capacity. It’s in the interest of the US and China to avoid a major trade war and avoid knee-jerk populism and self-interested business lobbies. Hopefully, the Chinese government will begin listening to this school of Chinese businessmen who recognize this eventuality and can not only live with it, but actually welcome it.

]]>https://globallyimbalanced.wordpress.com/2010/03/30/voices-from-within/feed/3ranjanxroyThe Beginning…https://globallyimbalanced.wordpress.com/2010/03/30/the-beginning/
https://globallyimbalanced.wordpress.com/2010/03/30/the-beginning/#respondTue, 30 Mar 2010 12:57:50 +0000http://globallyimbalanced.wordpress.com/?p=27It’s been a while since I last blogged, but constantly seeing stories about the Chinese Yuan on the front page of the FT got me itching to start up a new blog. After previously writing with a few other authors at Shadow Bankers, I’ll be starting up Globally Imbalanced as an individual site. I plan to mainly focus on economic policy issues related to China/Southeast Asia, but will also occasionally rant about politics and general macroeconomic issues. The next month should be incredibly eventful in US-China relations and I hope readers will enjoy and learn more than they ever wanted to know about China’s currency.

For a quick background, I was an Emerging Markets trader for a large bank in New York City for seven years, focusing primarily on Asian markets. While having previously traded the Singapore Dollar, I now use them daily as I’ve moved out to Singapore, where I’m pursuing a MBA through INSEAD. It’s already been a wild ride starting business school in a country I read about for years, and I’m looking forward to getting more deeply involved in this dynamic region.

Another week passes…and another quiet, yet strategic announcement by China regarding the future of the Yuan. It was announced early this week that HSBC and the Bank of East Asia in Hong Kong would be the first foreign banks given the authority to issue debt denominated in Chinese Yuan. After their numerous announcements regarding bilateral currency swaps,Chinese officials have taken an even greater step towards pushing the Yuan towards eventual reserve currency status.

However Michelle Bachmann shouldn’t be panicking just yet, and remain focused on connecting swine flu to the Democratic Party, as we still have a ways to go before the Yuan can function as a reserve currency in any tangible manner. What China appears to be doing is simply increasing the liquidity of the Yuan in a very focused, regional manner. The usage of Yuan has been increasing at the level of the ‘man on the street’ as it’s slowly becoming more common that stores in Hong Kong are accepting Yuan for purchases. This is still limited by local residents only being able to purchase 20,000 Yuan per day with their Hong Kong dollars (yes, that’s nearly $3,000, but they do love their luxury goods). The announcement of offshore debt being issued in Yuan will now allow for the transacting of Yuan by the multibillion dollar pension fund. The end goal is whether its a local buying a $10 shirt or Bill Gross buying a billion dollar bond issuance, the purchase will take place in Chinese Yuan.

Why do they want this? As the frequency of Yuan Bonds circulating increases, so does the acceptance of the currency as a basis for business. The government of China will slowly be able to issue domestic debt in its own currency and sell it to foreigners. This is a major facet of economic power. One of the greatest benefits of being the issuer of a reserve currency, is the ability to have foreigners buy up debt denominated in your currency. The US is benefiting tremendously from the amount of debt around the world that is denominated in US dollars. The entire reason China is so delicately approaching the issue of reserve currency status, is all of the US dollars they accumulated over the past years were funneled into mostly USD-denominated debt. Now, they have just as much of an interest in preventing a sudden USD collapse as Obama & Co.

The flip side of this issue is the vulnerability of nations that do not issue debt in their own currency, an example being Argentina earlier this decade. After a period of hyperinflation in the 1980s, the government pegged its currency to the USD and issued billions of dollars of debt throughout the 90s. As their economy began to deteriorate rapidly from a combination of factors in 2001, investors began fleeing from the country’s assets. Government revenues and local trade were still executed in Argentine Peso, but the government needed to make interest payments on their debt in US Dollars. You now had a situation where the ability of the nation to pay out the interest on their debt is destroyed by the double-edged sword of a collapsing currency and collapsing revenue. That interest payment that was coming due was suddenly costing the government way more in Pesos than originally forecast, (note: the ARS was technically pegged to the USD so this pain is experienced through a variety of mechanisms) leading to Argentina eventually having to default on over 90bn USD of debt in 2001.

There are currently many examples of companies issuing debt in currencies other than their own. Corporations, especially of the multinational variety, often want to avoid fluctuations in their native countries local currency and instead look to base the issuance on a major currency. Some fairly hilarious names are borne of this practice, ranging from the fairly common Samurai bonds (non-Japanese entities issuing debt in Japanese Yen), to the Kangaroo Bond (Aussie Dollar denominated by non-Australian issuer in Australia), to the ubiquitous but less creatively named Eurodollar Bond (USD denominated by a non-US entity outside the US).

As the USD is still the world’s leading reserve currency and USD-denominated debt constitutes the vast majority of debt circulating (Eurodollar bonds are estimated to be nearly 80% of the international bond market), the announcement from China should be applauded. Moving away from the economic order where China’s consumption of USD and related assets allowed for excessive borrowing (concisely referred to as ‘Chimerica’ by Niall Fergson) in a careful manner should be the goal of economic policymakers globally. China’s effort to increase their currency’s presence in the world of debt is one key element of this healthy rebalancing.

Asia’s answer to the yearly Davos gathering, the Boao Forum of Asia, ended last week with some choice words from Lou Jiwei, chairman of the China Investment Corporation (CIC), China’s primary sovereign wealth fund (SWF). Mr. Lou, in a tone ironic enough to satisfy even the snarkiest of us bloggers, indicated China’s intention to reexamine investment opportunities in Europe:

“I have to thank these European officials. They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again.”

SWFs like the CIC invest government assets such as FX reserves or oil-related revenue in high-yield, long-term investments around the world. SWFs have existed for decades, investing the capital of oil-rich nations like Kuwait and Abu Dhabi. But recently, they’ve ballooned in size as a result of global trade imbalances and the rapid increase in oil prices. While their capital has been welcomed by the likes of Morgan Stanley, skirmishes such as the congressional blow-back against the Dubai Ports Deal ahead of elections in 2006 remind us that domestic distrust and political posturing still cary enough weight to stifle a business transaction involving a foreign government.

This was the case when Lou and Co. approached European officials in 2008. Even after their numerous ventures into U.S. markets, the Chinese did not find a receptive crowd in Europe. The resistance was due in large part to the lack of transparency in the operations of the CIC. As the IMF noted in 2008, the CIC operates with a level of opacity on par with the SWF of Russia, and other SWFs in the Middle East and Africa, which suggests that the opacity is itself the result of a desire to cloak the political motivations behind the investments. This is, of course, the argument of choice for those justifying their resistance to the CIC.

The SWF of Norway, the Government Pension Fund (GPF), on the other hand, has been dubbed an industry leader in disclosure practices and transparency by the IMF. European officials drew on the comparison between the CIC and the GPF in trying to bargain a ban on voting rights and a 10% ownership cap for any European interest held by the CIC. Lou responded to that proposal with the same, seemingly characteristic sense of humor:

I said I can’t accept this. They said Europe doesn’t welcome me, so I said fine, if Europe doesn’t want me, I won’t go, ” Mr. Lou said. “So I want to thank these financial protectionists, because as a result, we didn’t invest a single cent in Europe.”

Since the financial crisis has drastically limited the amount of credit available globally, Sovereign Wealth Funds will become even greater forces in global trade. Even though many increased their risk-taking immediately before the financial crisis and suffered losses as a result, collectively, SWFs still sit on a significant amount of global capital (estimated $3.8 trillion in 2008). As a result, they will continue to be major players in the capital markets and, as the Europeans have learned the hard way, should be welcomed into domestic markets.

And as for our friend Lou, he had no problem noting this significant change in attitudes towards Chinese capital:

“Europe is now very welcoming to us, and isn’t talking about such conditions any more. People suddenly look at us as a lovable force.”